What Does "Materiality" Mean in the Context of Real Estate?

The issue of “materiality” in the context of a real estate transaction is always important. Under the Code of Ethics passed pursuant to the Real Estate and Business Brokers Act, 2002, a material fact is defined as follows:

“material fact” means, with respect to the acquisition or disposition of an interest in real estate, a fact that would affect a reasonable person’s decision to acquire or dispose of the interest”.

Further, a real estate agent must determine, investigate and verify material facts, and they must be disclosed to clients.

But, just exactly what does “materiality” really mean?

Here’s what I think: the important aspects of the test for materiality are as follows:

Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable purchaser.

An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable purchaser in making his or her decision, rather than if the fact merely might have been considered important.

In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable purchaser as having significantly altered the total mix of information made available.

The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable purchaser’s deliberations.

Materiality involves the application of a legal standard to particular facts.

It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to purchasers.

The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient.

A court must first look at the disclosed information and the omitted information.

A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information.

As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment.

However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided….

All in all, my view as expressed above is not entirely capricious. It’s drawn almost word for word from Marshall Rothstein who published this analysis on 11 May 2012. It’s important because eight other people agreed with him. But, they were not just ordinary people; they were all Justices of the Supreme Court of Canada (including McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, and Cromwell JJ.). Justice Rothstein had been requested to write the reasons for the Judgment in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.

In this case, the Supreme Court of Canada considered the issue of materiality in the context of a required or mandatory disclosure statement. Vancouver Airport Centre Ltd. was developing two adjacent projects, one with the Marriott Hotel chain and the other with Hilton. The Marriott project contained a guarantee, the Hilton project had lower fees but no guarantee. As it turned out, the Hilton investors lost money, so the Marriott project was the better deal.

The Hilton investors sued for the losses they sustained claiming that the differences between the two should have been pointed out in the disclosure statements associated with the Hilton project.

In this case, the project developers needed to comply with securities legislation as well as real estate laws. The titles to individual strata units (condominiums) was being transferred.

So, in that regard, this case is unusual. Ordinarily, the doctrine of caveat emptor applies to real estate transactions. In this case, since the developers were promoting the units and selling them as investments (not just real estate units for personal use), the securities laws applied, including mandatory disclosure requirements.

The Court held that the potential conflict of interest, that being the possible propensity to favour the Marriott project over the Hilton project was not material in the grand scheme of things.

The issue of materiality is very much in issue in most real estate transactions, and in this case, the Supreme Court of Canada considered the issue in detail.

Now, we have 9 judges all in agreement. Where did they get this concept of materiality?

Actually, they borrowed it from the Supreme Court of the United States, which expounded the law in its decision TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976):

. . . if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.

So, as I pointed out earlier, my views here are not entirely capricious. The Supreme Court of Canada and the Supreme Court of the United States feel the same way about the application of the law and the test of “materiality”.

Should any matter in Ontario be litigated which deals with the meaning of the term “material” in the context of a real estate transactions, this decision of the Supreme Court of Canada will be considered and applied.